asia

ASIAN MARKETING STUDY

Introduction

The use of hybrid ultra heavy air vehicles in the near term is very different for Asia than for Canada. Canada's primary purpose is to reach their far northern territories in order to drill for oil and to build pipelines to their southern oil distilleries, to mine minerals, and to log timber. The further emphasis is on Northern Community supply chain. They would also use them for re-supplying the northern workers and First Nations Canadians.

The Asian situation requires the movement of present day cargo both domestic and international especially to, from and within China. With the tremendous growth in China since its economic reform starting 1978 and the forecasted growth, their residential resource economy is being grossly over burdened. The problems facing China include: abundant but inaccessible natural resources. A population and industrial and manufacturing base mainly in the eastern portion of the country, coupled with limited access to the western frontier, and their already choked transportation systems.

This report will examine the existing conditions within China, including their economy, population, and resources; the forecast for these resources; and future accessibility of oil and minerals.

World Trade Trends

After only modest growth initially following the 2001 global recession, world wide international trade in goods and services has rebounded strongly of late, increasing by about 10 percent in 2004, or approximately double the rate of growth in world Gross Domestic Products, GDP, which is the total value of all goods and services produced with in a country per year, minus net income from investments in other countries. China, while having only 5 percent of the World trade share, grew from almost 28 % to almost 29 % in annual export growth between 2003 and 2004; and the annual import growth was from 22 % to 28%. The other East Asian countries had similar growth, going from 11% to 16 % in exports and 7% to 15 % in annual import growth. In large part, this reflects the tendency for trade to fluctuate by more than just output. However, it also reflects the consequences of ongoing trade liberalization, and changing demand for final goods and factor inputs as economies develop. The recovery in world trade has been propelled mainly by China and other East Asian economies, which are becoming increasingly engaged in international commerce of world trade. China contributed approximately 25 percent of the increase in trade in 2004 and became the world's third-largest merchandise exporter. In contrast, the major industrialized countries, despite accounting for nearly half of world trade, contributed only around a third of the increase in 2004.

The uneven contributions to growth in world trade in part reflect divergences in economic growth across regions. Hesitant demand growth in the Euro area explains the modest growth of export and import volumes in the region, since intra-regional trade accounts for around two-thirds of the areas total trade. In the United States, trade has been expanding somewhat faster, as strong domestic demand has induced ongoing growth in imports; exports have also staged a recovery, though not one that has been sufficient to arrest further widening of the trade deficit. Japan has seen yet stronger trade growth, with its trade surplus continuing to swell, underpinned by strong demand for its exports from the rest of Asia; most notably, its exports for intermediate and capital goods to China have been growing rapidly.

The East Asian region (excluding Japan) has undoubtedly recorded the most impressive trade performance. The surge in demand for International Trade Centre (ITC) goods in 2003-2004 boosted the region's exports of manufactures, while the region's imports have accelerated as China increasingly calls on the rest of the world for raw materials to satisfy its ongoing process of industrialization. There has also been a substantial change in the pattern of East Asian trade, with intra-regional trade growing in importance. In 2004, 37 % of East Asian merchandise exports went to economies elsewhere in the region, up from around 33 % five years earlier. This shift has been fuelled not only by increased final demand within the region, particularly from China, but also by a reorganization of production processes into regional networks. Goods are increasingly being assembled in China from parts sourced elsewhere in the region, and then exported to developed countries. This largely explains why China has recorded growing trade surpluses with the US and Europe, but trade deficits with the rest of Asia.

The pattern of global trade has had major implications for the prices of traded goods and services. The emergence of China as a major producer has put downward pressure on the world price of manufactured goods. On the other hand, China's seemingly insatiable appetite as an importer of raw materials has contributed to the surge in world commodity prices, including oil. Consequently, commodity importers, such as East Asia, Japan and United States, have experienced deterioration in their terms of trade. In contrast, the rise in world commodity process has been beneficial for commodity exporters, such as Australia and Canada, and a number of countries in Latin America and the Middle East.

The strength of world trade patterns can also be seen in global shipping freight rates, as shipping still accounts for around two-thirds of the value of all international goods transportation. In line with the pick-up in freight rates has been especially concentrated on trade routes to Asia, and the ports along these routes have become increasingly congested. Conditions are generally expected to remain tight, in part due to short-run inelasticity in the supply of ships and continued strong world activity.

As with GDP growth, world trade activity is expected to ease, but remain healthy. The International Monetary Fund (IMF) projects world trade to grow by 7.4% in 2005. However, the recent trend of greater involvement by emerging economies in international commerce is set to continue, with China and other East Asian economies likely at account for a growing share of world trade.

It is with this background in the world trade trends, that China, specifically, will be examined more closely.

China's Economic Development

China has a land area of about 9.6 million square kilometers (about 6 million square miles), similar in size to the United States. It is largest developing country in the world. As of 2002, there are 1,284 million people residing in mainland China. Economic reform and opening up to world markets began in 1978. Since then, the Chinese economy has expanded rapidly. The GDP has increased from virtually 0 in 1950 to about 3,500 billion Renminbi (RMB), which is their local currency, in 2000 and is forecast to reach between 6,000 billion and 12,000 billion RMB by 2020. Despite the challenges of the 1997-1998 Asian currency crisis and the 2001 worldwide economic recession China's mainland economy has maintained an average growth rate of 7.7% since 1997. As one major stimulus to the nation's economy, China's international trade has grown even more rapidly since 1978, with an average growth rate of 15.2 %. In 2002, the total value of import and export reached 621 billion USD, of which, export was 326 billion USD and import was 295 billion USD. Machinery products accounted for 50 % of the total value, and high-tech products including Information Technology (IT)/biochemical products and precision instruments contributed 24%. However, the growth is geographically imbalanced within China.

China can be separated into western, middle and eastern regions. As of 2002, over 70% of the total mainland population resides in the middle and eastern regions, which account for only 28.5% of the land area. Although all parts of the country have seen rapid growth, the real economic boom is on a narrow band along the coast in the East region. The geographical imbalance of international trade and economic development is striking with East region domination of all economic metrics.

Accompanying the rapid economic development in the East region was rapid urbanization. As of 2002, the mainland urban population had tripled from 1978 level to 502 million. The share of urban population had increased from 19.4 % in 1978 to 39.1% in 2002. The urbanization is partially attributed to the migration of labor force from the inland countryside to the large cities.

Airports

As of 2002, there were about 150 commercial airports operational in mainland China. Of these 150 airports, only about 22 can facilitate Boeing 747 and Airbus 380 aircraft. Again, basically all of these airports are in the middle and eastern regions, with only one, Urumqi, being in the western region. According to China's plans, the total number will increase to 237 by 2010. However, the new airports will be small serving regional markets and the general layout to the airport distribution is not likely to change significantly. The major efforts in airport development in China will be to improve operational conditions and increase capacity at the major hub airports. Air cargo throughput at mainland airports has tripled over the past ten years, with an average annual growth rate of 14.1 %. The total cargo throughput in 2002 was approximately 4 million metric tons, of which, 73 % was for domestic routes and 27% for international routes. The four main throughput airports systems are Beijing, Shanghai, Guangzhou, and Hong Kong, with the first three accounting for about two-thirds of the mainland throughput and Hong Kong being equivalent to the sum of these three major mainland airport groups. It is worth noting that Hong Kong still serves as the most important international trade port for mainland. This is attributed to its extensive international network and its role as the dominant transit port between mainland and Taiwan since direct trade is still restricted by political barriers.

Since 1978, the domestic air cargo has experienced an annual growth rate of 18 percent. The average air cargo trip distance has been gradually increasing. As of 2002, the average cargo trip distance for domestic routes reached 1,457 km. The average trip distance of international air cargo has been increasing as more long-haul freighters were added into the fleet.

Current Cargo Operating Practices

In mainland China, domestic air cargo is primarily carried in the belly space of passenger aircraft. As of 2002, there were no dedicated domestic air cargo carriers. International air cargo transportation is quite different. National flagship carriers have been expanding their long-haul air freighter fleets to capture the demand over the past few years. The problems facing mainland airports and carriers are the limited network connections to the world, cargo handling efficiency, and the ground accessibility to major international hubs for shippers.

Factors Affecting Air Cargo Development

For mainland China, surface transportation infrastructure and government policies are significant in determining the likely future development of air cargo.

Rail

The principal alternative mode of freight transportation in China is rail. There is an extensive and expanding state-owned rail transport system. In 2002, there were 44,438 miles of railways in operation with 1,060 billion ton-miles carried. In comparison, the US Class I railroads have 99,250 miles of track and carried 1,466 billon freight ton-miles in 2000. By 2007, the railroad network will connect all the provinces and major cities in mainland China. To compete with highway and air transportation, the rail administration has launched a series of system upgrades to raise the operating speed in addition to the network expansion. The rail system now handles 62 mph speeds, which makes it attractive for freight. Currently two more speed-raises are planned on 28 rail routes. The maximum speed will then be 125 mph. In short rail cargo would be a strong competitor, because of its efficiency and low costs, to air cargo on short/medium-range routes where direct rail service is available.

Highway

Virtually all the highways are in the eastern region. A program has been launched to construct 21,750 miles of backbone networks. The purpose is to connect all the major cities (i.e. population of one million and above), and 93 % of all large cities (population of half million and above) with high-grade arteries. Upon completion in 2010, the average travel speed should be doubled from that of todays national highway network, providing express surface channels for intercity passenger and cargo transportation.

The investment in road system has two effects regarding air cargo. First, it will significantly improve the investment environment, enabling sustained economic growth. For the inland regions, it is a key element in assuring the realization of the government's long-term economic development plan. Second, the fast surface connection will improve airport access. Since the intercity air cargo in china is not meant for short range, limited competition is seen for the increased highway transportation infrastructure.

China's World Trade Organization (WTO) Entry

China's entry into the WTO accession in December 2001 initiated a new era of China's reform and opening up to the world. The systematic opening of markets and China's commitment to its WTO obligations is boosting investor's confidence. As a result, international trade is expected to continue to grow. The government has set the international trade target at 2,000 billion USD by 2020, which implies an average annual growth rate of 7.2%.

Revised Regulations if Foreign Investment in Aviation Industry

Revised regulations on foreign investment in China's aviation industry took effect on August 1, 2002. These revisions widened foreign investor's access to the air transport market. The regulation relaxed the share-holding limitation in domestic airlines and airports form 35 % to 49%. No limitations are set for air cargo ground services and warehousing. Foreign investments together with modern operation techniques and management are expected to improve the operation efficiency and stimulate the domestic market.

West Region Development Strategy

As mentioned earlier, the economic development in the vast West region is slower than the East of China. The West Region Development strategy, established in November 1999, has the goal of accelerating the economic development. The government's investment focuses on infrastructure construction as well as ecological protection and restoration. The West has abundant natural resources and low labor costs. These factors, coupled with infrastructure improvements, are expected to provide new investment opportunities. The large distance between the Western and Eastern cities coupled with the weak surface transportation infrastructure in the West implies an important role for air transportation and air cargo in this region.

Shipping

World shipping industry has been undergoing a structural change over the last decade and the changed map has never been clearer nowadays. The feature of the change is that, Asia, notably East Asia, has overwhelmingly become the powerhouse of world shipping business as the largest importer of raw materials and largest exporter of manufactured goods. Though Asia GDP figure is smaller than the US and European Union this region has consumed more raw materials and produced more manufactured products than either of them.

Asia imported about 15 million barrels of crude oil per day in 2003, accounting for 43% of world oil trade. As for the three major dry bulk cargoes of iron ore, coal and grain, Asia imported over 1.3 billion tons, 57% of the world trade of these goods. In terms of container trade, Asia's port throughputs were 152 million Twenty feet Equivalent Units (TEUs) in 2003, 52% of the world total; Asia has taken the leading position in all of the major shipping categories.

To meet these multi-product demands, seaborne freight tonnage to China have increased dramatically and over a relatively short period of time. Tight ship availability and strong freight demand origination from China have increased freight rates by 200% from January 2003 to April 2004. In an effort to maximize their return, seaborne shipping companies have redeployed in the shipping fleet to Asia generating a shortage of carriers in the Europe-to-US fleet. As a result, freight rates have increased in Europe as well and a decline in ship availability in Europe has materialized. Indeed, despite expanding economic growth and increased trade demands, the number of bulk carrier ships worldwide was stagnant for 1985 to 2001. China's dramatic increase on international shipping demand was largely unforeseen by the shipping industry.

This surge in the shipping industry, while necessary for China's economic growth, has put tremendous pressure on the ports and the mainland transportation system, as once again everything is piling up on the Eastern coast.

Market Forecast

The Chinese government plans to quadruple GDP by 2020 from the 2000 level, implying an average annual growth rate of 7.2%. This rate has been substantiated by other recognized organizations and institutes, such as Morgan Stanley, World Bank Group, and London based Consensus Economics Inc.

Since economic growth has been the prime driver for air cargo demand, the aggregate forecast of future air cargo in china can be projected based on the relationship between air cargo demand and economic development. Given the GDP projections, forecasts of air cargo carried by domestic Chinese airlines can be derived. The average growth rates of air cargo carried with respect to low, baseline and high predictions are 8.6%, 11.2%, and 14.0% respectively. The baseline prediction is higher than Boeing's prediction of 10.5%.

As mentioned before, the average trip distances of both international and domestic cargo flown by mainland Chinese airlines have been increasing over the years. In the future, for the market, more cargo is expected to flow between the Western and Eastern cities implying that the average trip distance will continue to increase. For conservative purposes, current average trip distance is assumed for forecasting period, implying that baseline Freight Tonnage per Kilometer (FTK) is expected to grow at 11.2% as well. Therefore, the total throughput at mainland airports is expected to grow at the same 11.2% per annum baseline projection.

For the baseline projection, the forecasts project that the air cargo traffic performed by domestic Chinese airlines will expand more the seven fold from its 2002 level by 2020. The air cargo traffic performed by domestic airlines is expected to grow to 34.8 billion freight-ton kilometers by 2020. The total cargo throughput in mainland airports is expected to reach 27 million tons. These expansions in air cargo will create opportunities and impose challenges for system infrastructure.

Natural Resources and Raw Materials

As China continues to its impressive economic growth, access to natural resources and raw materials is becoming increasingly vital, and will feature more prominently on the policy agenda of the decision makers in Beijing. If China seeks to maintain its economic growth rate of 1985-2003, it will face a major raw materials shortage and will be forced to focus on Eurasia as a source of major energy resources, water and food. This is likely to lead to growing economic and political involvement in Russia and Central Asia.

The Chinese government has designated oil, minerals, grain and water as strategic commodities with maximum influence on economic development. While China is the world's fifth largest oil producer, demand is outgrowing economic production. By 2020, china will not be able to supply itself with oil, iron, steel, aluminum, sulfur, and other minerals. Official Chinese statistics show China's oil production growing at the rate of 1.7% a year, while demand is growing at 5.8%. China is a net importer of oil since 1993.

A third of imports will come from Russia, some for the Caspian and Central Asia, and the rest from the Middle East area. Economic cooperation is already a high priority in the Sino-Russian partnership, and is increasingly important in Beijing's relations with Central Asia. Neighboring Siberia boasts the large oil fields in Kovykta; natural gas fields in Yakutia; and coal basins and millions of acres of pristine forests. Some of the past overlooked oil deposits have now become more viable with the price of oil rising to above $ 30 a barrel. China itself is prospecting for oil and natural gas in the Tarim basin in Xinjiang, Western Region and constructing a 2,600 mile long East-West oil and gas pipeline which may cost as much as $18 billion.

This appetite for natural resources will open doors for major capital projects aimed at supplying China, such as oil, gas, and water pipelines. China and other Pacific industrial powers such as Japan and Korea, form the largest oil-consuming region in the world. China experts predict that Russia will be able to export annually 25 to 30 billion cubic meters of natural gas to China annually; 15 to 18 billion kilowatts of electricity for hydroelectric poser stations in Siberia and 25 to 39 million tons of oil from the Kovykta oil field in Eastern Siberia. For the foreseeable future, the West will remain China's leading investment and manufactured goods trading partner while Eurasia will become an important source of raw materials.

However, it is on the East Siberian-Far Eastern petroleum province where geographical and geological constraints converge with vengeance. According to the revised version of the officially promulgated Energy Strategy, East Siberia and the Far East must account for most of the increase on output after the end of this decade. This means that the East Siberian province needs to provide nearly half of all new oil, both for replacement and for any net increase by the early years of the 2010 decade. The convergence of these severe and independent constraints will, on the one hand, delay Russia's oil industry unto a much higher cost plane, which in view of the over such long time horizon may further slow development. This is especially true, since the largest potions of capital outlays in the East Siberian province will coincide with sharp deterioration of field conditions and consequent investment demands in the West Siberia itself.

The geographic obstacles of developing the East Siberian petroleum province need little elaboration. Even the most promising sections for hydrocarbon exploration lie 500-700 miles further east that the oil producing centers of the Middle Ob River, Western Siberia; they are 700-1000 miles from the steel and machine building industries of the Urals, as the crow flies. Real distances for supplies via the TransSiberian Railway and river transshipment during the short summer season are far greater, and only primitive winter roads and helicopters can approach the sites themselves. Such geographic constraints are unmatched in it history of Russia's oil industry.

Future Outlook for Hybrid Air Ships

The China situation is different than for Canada, at least in the near term. The immediate need is to compliment the existing transportation systems. The infrastructure existing and being developed in the next few years will be adequate for the short haul routes, which is not the strong point of hybrid air ships. In the mainland, the transportation to the Western regions is a rising issue. There is only one major Western airport, Urumqi. With VTOL and amphibious capabilities, the air ship will be able to make point-to-point deliveries and pickups in the Tarim oil fields, located in China's Western region, and to other locations where no existing infrastructure exists. This will also allow raw materials to be returned to the Eastern sea ports or to processing plants within East Asia. Other air ship missions will also be available within East Asia to circumvent already over burdened air and sea ports. The movement of cargo on the international level will also afford many opportunities for air ships, especially moving heavy, over sized equipment. With China's economy increasing at 7% to 11% in virtually all areas, it will be a necessity to find some solution to the bogged down transportation modes, and at a reduced operating cost, to be able to keep the economy moving towards the government's goals.

In the long run, it will be essential for China that the Eastern Siberia oil reserves be developed. This situation mirrors the Canadian situation, where it will require something like the hybrid air ship to transport equipment, supplies and people to the desired locations.

Millennium Airship Inc/SkyFreighter Canada Ltd

ASIAN MARKETING STUDY

Introduction

This report will examine the existing conditions within China, including their economy, population, and resources; the forecast for these resources; and future accessibility of oil and minerals.

World Trade Trends

The uneven contributions to growth in world trade in part reflect divergences in economic growth across regions. Hesitant demand growth in the Euro area explains the modest growth of export and import volumes in the region, since intra- regional trade accounts for around two-thirds of the areas total trade. In the United States, trade has been expanding somewhat faster, as strong domestic demand has induced ongoing growth in imports; exports have also staged a recovery, though not one that has been sufficient to arrest further widening of the trade deficit. Japan has seen yet stronger trade growth, with its trade surplus continuing to swell, underpinned by strong demand for its exports from the rest of Asia; most notably, its exports for intermediate and capital goods to China have been growing rapidly.

The East Asian region (excluding Japan) has undoubtedly recorded the most impressive trade performance. The surge in demand for International Trade Centre (ITC) goods in 2003- 2004 boosted the region's exports of manufactures, while the region's imports have accelerated as China increasingly calls on the rest of the world for raw materials to satisfy its ongoing process of industrialization. There has also been a substantial change in the pattern of East Asian trade, with intra-regional trade growing in importance. In 2004, 37 % of East Asian merchandise exports went to economies elsewhere in the region, up from around 33 % five years earlier. This shift has been fuelled not only by increased final demand within the region, particularly from China, but also by a reorganization of production processes into regional networks. Goods are increasingly being assembled in China from parts sourced elsewhere in the region, and then exported to developed countries. This largely explains why China has recorded growing trade surpluses with the US and Europe, but trade deficits with the rest of Asia.

It is with this background in the world trade trends, that China, specifically, will be examined more closely.

China's Economic Development

Airports

Current Cargo Operating Practices

Factors Affecting Air Cargo Development

For mainland China, surface transportation infrastructure and government policies are significant in determining the likely future development of air cargo.

Rail

Highway

Virtually all the highways are in the eastern region. A program has been launched to construct 21,750 miles of backbone networks. The purpose is to connect all the major cities (i.e. population of one million and above), and 93 % of all large cities (population of half million and above) with high- grade arteries. Upon completion in 2010, the average travel speed should be doubled from that of todays national highway network, providing express surface channels for intercity passenger and cargo transportation.

China's World Trade Organization (WTO) Entry

Revised Regulations if Foreign Investment in Aviation Industry

West Region Development Strategy

Shipping

Market Forecast

Natural Resources and Raw Materials

A third of imports will come from Russia, some for the Caspian and Central Asia, and the rest from the Middle East area. Economic cooperation is already a high priority in the Sino- Russian partnership, and is increasingly important in Beijing's relations with Central Asia. Neighboring Siberia boasts the large oil fields in Kovykta; natural gas fields in Yakutia; and coal basins and millions of acres of pristine forests. Some of the past overlooked oil deposits have now become more viable with the price of oil rising to above $ 30 a barrel. China itself is prospecting for oil and natural gas in the Tarim basin in Xinjiang, Western Region and constructing a 2,600 mile long East-West oil and gas pipeline which may cost as much as $18 billion.

Future Outlook for Hybrid Air Ships

Millennium Airship Inc/SkyFreighter Canada Ltd